Learning to Trust Credit Cards

Hey Simple Dollar readers, I wanted to share an article by a new contributor to the site, Ellen Gans. In it she examines her own relationship with credit cards over the years, focusing on what it takes to really trust yourself to open up a card at all. Ellen is right in believing credit cards require no small amount of self-discipline. But working towards a great credit score is a crucial sign you are coming into financial adulthood.

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Americans rely heavily on credit cards for everything from a gallon of milk to major purchases. Many of us whip out the plastic without giving it a second thought. I wasn’t always one of those people.

I’ve been something of a penny pincher for as long as I can remember. For that reason, credit cards intimidated me for most of my young adult life. Using a credit card felt like cheating, and it felt like a slippery slope into debt.

This is the story of how a cheapskate learned to trust credit cards. Responsibly.

A National Habit

Reportedly, more than 75% of Americans hold at least one credit card. Of households with credit cards, 44% carry a balance. That adds up to a whole lot of people who are paying interest on a carton of eggs or a tank of gas.

Perhaps that’s why credit cards have earned something of a dubious reputation. We’ve become a credit card nation, and also a nation rife with debt. As of July 2013, average household credit card debt stood at $15,325. That means that for every household with $500 in debt, there’s another with $30,000 in debt.

With all these frightening statistics, it’s no wonder I was a little gun-shy about credit cards. I grew up in a frugal household. We took camping trips and road trips instead of fancy vacations. We had a garden at home. My parents invested in quality time and education instead of material goods.

The result? I had an obnoxiously idyllic childhood. It was wonderful. I’m very lucky. Perhaps that’s why I don’t think spending money necessarily equates to happiness. I know it’s why I’m cautious about spending. Some people might say I’m a bit stingy.

Here’s the thing: I’m not afraid of spending money. I’m afraid of spending money irresponsibly. For a long time, I associated credit cards with irresponsible spending. There’s something so concrete about cash. You know exactly how much you have in your pocket, and when it’s gone, it’s gone. You can’t overspend.

Credit cards, on the other hand, are just a little too easy. The number on a receipt doesn’t carry as much emotional weight as forking over a fistful of cash. The next thing you know, you have a big bill comprised of who-knows-what, and if you don’t pay it, you’ll end up paying more.

That’s it. That’s my plastic phobia in a nutshell.

Why It’s Smart to Be Wary

That revenue comes from interest rates and fees — and it’s a profitable business. The Federal Reserve reports that “credit card earnings have almost always been higher than returns on commercial bank activities.”

The most obvious ways credit cards cost you money? Carrying a balance. If you don’t pay off your credit card each month, you’ll pay interest on the balance. These interest rates are commonly 20% or higher, and they add up quickly. Late payments are also problematic. Even one late payment can result in fees or unfavorably adjusted interest rates.

Both of these activities can also ding your credit score. The impact of a less-than-perfect credit score can resonate throughout many areas of your life, including your ability to secure jobs, apartments, cars, and loans of any kind.

Many credit cards also hit consumers with hidden fees. Even the most well-intentioned cardholders can fall victim to complex and confusing card policies. It’s the fine print trap.

How I Made Peace with Credit Cards

It wasn’t until graduate school that I began to embrace the credit card. I was on a budget, so this could have been a recipe for disaster. Instead, I did some research and made a commitment to use credit cards responsibly.

Here are the reasons why I opened a card:

Rewards: I compared options and opted to open a card with a strong travel rewards program. At the time, I lived across the country from my family and fiancé. Thus, affordable travel was very important to me.

Convenience and Safety: I lived in Los Angeles, and decided I didn’t always feel safe carrying around large amounts of cash. Sure, my credit card could be stolen, but the card I chose had a good fraud protection policy.

Emergencies: While I hoped I wouldn’t need it, it made sense to have a card available in case the unexpected happened. I reasoned I was better off making a large emergency purchase on a credit card than being forced to visit a loan shark.

Building Credit: Using a credit card responsibly can be an effective way to build credit, and that was important to me.

When I opened my card, I made a very important decision: I would pay off the balance in full and on time – every single month. Here’s how I made it work.

First, I pretended that my credit card was cash. Next, I tracked every single purchase in a spreadsheet and closely monitored my balance. If buying that new pair of jeans meant I wouldn’t have enough to make a full payment that month, I didn’t buy the jeans. The interest rate wasn’t worth it. Then, I set an alert to remind me to make payments. My bill was due on the first of the month; I created an email alert so I’d always know to make the payment on time.

The Bottom Line

It didn’t take me long to get in the habit of using my credit card for everything — even that gallon of milk. It didn’t feel as scary once I knew I could use a credit card and still maintain responsible spending habits.

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